Marginalia

Accumulations

A year ago, as seen above, Brazilian sovereign debt was a hot commodity. Now it seems to be dragging itself through the mud, thought it continues to operate and, yes, to enjoy the full sympathy of the federal government.

Exame magazine telephones around and gathers sound bites from the short-sellers. It is a solid, though not completely lurid, example of a moral panic campaign. The short sellers and the vultures have taken the field.

Rio de Janeiro/São Paulo – At a time when the effects of a growing investigation have led to the downgrading of Petrobras to below investment grade, derivatives traders believe that government assistance, on its own, will not be enough to prevent further downgrading of the company’s credit rating.

Comparing the cost to an investor of protecting himself against defaults on debt, the cost of protecting bonds have more than doubled since accusations of corruption and bribery at the state-owned Petrobras emerged in November.

The premium soared to 3.5% last week, the largest in its history.

Moody’s Investors Service this week downgraded the credit rating of Petrobras by two steps, as the result of a concerns that the corruption probe will harm the company’s ability to repay debt amounting to US$ 135 billion, the largest among all the publicly traded petroleum companies in the world.

“The government is apparently favorable to supporting the company, but this seems insufficient with respect to the quality of the credit, said Paulo Gala, a strategist at Fator SA Corretora de Valores, by telephone from São Paulo.

The government granted Petrobras up to R$ 6 billion (US$ 2.1 billion) from state-owned banks in order to reinforce the company’s cash position, according to the daily O Estado de S. Paulo last Thursday, citing an unidentified company executive.

Petrobras, which has been practically excluded from the international credit markets due to the federal investigation, holds nearly US$ 52 billion in bonds.

The double downgrade is the second rating cut by Moody’s in less than a month.

Though it will likely be forthcoming, the support of the government will not be enough to avoid more downgrades to junk bonds, said Fabiano Santin, credit analyst at XP Investimentos CCTVM SA.

“If I had a position in these bonds, I would get out, because the probability of another downgrade is quite real,” he said.

Swaps Rising

Fitch, in an e-mail response to questions, said that it has not changed its outlook on Petrobras. S&P preferred not to comment on a possible rating change for Petrobras.

The five-year derivatives known as credit default swaps rose 2.8% to 6.06% since November 13, the day before the police arrested 20 persons as part of an investigation into whether Petrobras executives demanded bribes from public works contractors in exchange for contracts.

Fitch, in an e-mail response to questions, said that it has not changed its outlook on Petrobras. S&P preferred not to comment on a possible rating change for Petrobras.

Although Brazil does not formally guarantee Petrobras debt, the government’s position as the largest shareholder has historically given investors confidence that state assistance was practically guaranteed, in the event of difficulties.

Fitch, in an e-mail response to questions, said that it has not changed its outlook on Petrobras. S&P preferred not to comment on a possible rating change for Petrobras.

Treasury minister Joaquim Levy signaled this week that would be greater fiscal austerity and a reduced role for public banks in the concession of credit.

“There will be more downgrades,” said Jorge Piedrahita, CEO of the brokerage Torino Capital in Nova York … “Petrobras is still in a state of disorder,” he said via e-mail.

Fitch, in an e-mail response to questions, said that it has not changed its outlook on Petrobras. S&P preferred not to comment on a possible rating change for Petrobras.

The five-year derivatives known as credit default swaps rose 2.8% to 6.06% since November 13, the day before the police arrested 20 persons as part of an investigation into whether Petrobras executives demanded bribes from public works contractors in exchange for contracts.

In Brazil, similar swaps contracts cost 2.56%.

Although Brazil does not formally guarantee Petrobras debt, the government’s position as the largest shareholder has historically given investors confidence that state assistance was practically guaranteed, in the event of difficulties.

Treasury minister Joaquim Levy signaled this week that would be greater fiscal austerity and a reduced role for public banks in the concession of credit.

“There will be more downgrades,” said Jorge Piedrahita, CEO of the brokerage Torino Capital in Nova York … “Petrobras is still in a state of disorder,” he said via e-mail.

State Banks Under Pressure

State-run banks, in particular, would be compelled by the Brazilian government to help Petrobras and suppliers cope with restricted access to credit in the wake of the scandal, Vansetti said. Apart from state development bank BNDES, which is Petrobras’ largest creditor, other government lenders with exposure to the oil giant include Banco do Brasil SA and Caixa Econômica Federal.

Private-sector lenders including Itaú Unibanco Holding SA have ramped up loan-loss provisions and tightened credit disbursement standards to mitigate problems stemming from the Petrobras scandal. Banks fear that some companies could be blocked from bidding on government contracts, impeding their access to financing.

“The investigation into Petrobras could exacerbate the situation for Brazil’s banks, given that expectations for loan growth in 2015 were already modest,” Vansetti said in the report.

Any increase in loan-loss provisions related to credit disbursed to Petrobras and its suppliers, as well as to the broader oil and gas and construction sectors, “would hurt earnings and lead to a tightening of credit, which would reverberate throughout Brazil’s economy,” the report said.

Last month Moody’s stripped Petrobras of its investment-grade rating and warned that further cuts were possible. Worries over a looming cash crunch and the scandal were behind the downgrade, Moody’s said at the time.

What is significant is that Fitch and S&P seem to have quietly hedged their bets.